Aid Commitments and Strategic Behavior : Game-theoretic explanations of donor stinginess

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Aid Commitments and Strategic Behavior

Game-theoretic explanations of donor stinginess

Andreas Holmedahl Hvidsten

Master Thesis, Department of Political Science University of Oslo

Autumn 2010

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Summary

Donor countries have a poor track record of meeting their foreign aid commitments.

Yet the discrepancy between aid commitments and actual delivery of aid has received little scholarly attention. Traditionally, studies of aid allocation have assumed that donors provide an amount of aid that they deem satisfactory. In this thesis, I explore the possibility that the current lower-than-promised quantities of aid may be unsatisfactory for donor countries, i.e., that they would prefer an alternative state of the world with higher aid levels. Specifically, I consider how strategic interaction can lead donors to give less aid than they would ideally prefer.

Using game theory, I find two main reasons for why a donor may give less aid than it would ideally prefer: 1) a donor may only want to provide aid on the condition of certain behavior by the recipient. If the donor believes or experiences that the recipient does not conform to this behavior, the donor may restrict aid even though it would ideally prefer to give more; 2) donors may see aid as a contribution to a public good, and be tempted to free ride on the efforts of each other. If the voluntary production of the good is Pareto suboptimal and effective enforcement mechanisms are absent, the resulting quantity of aid is unsatisfactory for the donor countries.

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Acknowledgements

It is hard to overestimate the importance of my supervisor, Jon Hovi, to this thesis.

Little over a year ago, he helped to form my nascent ideas into a coherent research question, and his guidance throughout the writing process has had an immeasurably positive effect on the quality of the final product. I feel privileged to have had Jon as my supervisor.

Writing a master thesis can be a lonely affair. I would like to extend my grati- tude to the people around me that have made it less so. For insightful comment on my work and for ensuring that coming to Blindern every morning was a pleasure, I am sincerely grateful to all the members of ―Kaffislabberas‖ (you know who you are). I should also mention the support from my family. I am particularly grateful to my little brother, whose algebra skills were a big help early on.

Finally, I would like to thank Silje for proofreading parts of thesis, and for put- ting up with my increasingly anti-social behavior during the writing process. To all:

thank you!

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VI

Chapter 1 Introduction

1.1. Objective

Following the declaration of the Millennium Development Goals in 2000, the Monter- rey Consensus on financing for development was established in 2002. As part of this consensus, all developed countries pledged to contribute 0.7 percent of gross national income (GNI) to official development assistance (ODA)—the 0.7 target.¹

Despite the promises, only five countries currently meet the 0.7 target;² on av- erage, high-income countries contribute only 0.47 percent of GNI to ODA. In real terms, the shortfall adds up to over 150 billion dollars (DAC 2010b). In 2004, Jan Ege- land, then UN Under-Secretary General for Humanitarian Affairs, chose these words to characterize the aid efforts of most donor countries:

―[T]he foreign assistance of many countries now is 0.1 or 0.2 percent of the gross national income, I think that is stingy, really, […] I don't think that is very generous‖ (CNN 2004).

This thesis is about why donor countries do not deliver on their aid quantity commitments.

1.2. Research question

Why do donors not honor their aid commitments? One explanation is that donors may not actually want to fulfill their aid promises, i.e., that they are happy with the status quo of moderate quantities of aid. In this view, lofty aid goals are merely window dressing, and not a reflection of actual preferences. This seems to be the default explanation for the lack of compliance with aid targets (see section 1.3).

1 To be precise they agreed on making ―concrete efforts towards the target of 0.7 percent of Gross

National Product (GNP) as ODA‖ (UN 2002: 14). Gross National Product (GNP) is equivalent to Gross National Income (GNI), bar a few technicalities. Today, the convention is to use GNI. For a more thorough discussion of the 0.7 target, see section 2.4.1.

2These are Denmark, Luxembourg, the Netherlands, Sweden, and Norway. The numbers for 2010 are not in yet, but it looks like Belgium might join the group of countries that meet the 0.7 target this year (EU 2010: 16).

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Another, perhaps more interesting possibility is that donors see the current situation as unsatisfactory, i.e., that they would prefer an alternative state of the world with higher aid levels. In this thesis, I explore the possibility that not meeting aid commitments may be undesirable for donor countries. My research question is as follows:

How can the current situation with lower-than-promised levels of aid be unsatisfactory for donor countries?

1.3. Literature review

The literature on donor behavior has primarily been concerned with why donors give aid, and to whom. The discrepancy between the promises and the actions of donor countries has received little scholarly attention. To my knowledge, no existing studies consider systematically how donors view own and other donors‘ lack of compliance with aid commitments. In this section, I review the existing literature on donor behavior and find that it lends support to the notion that moderate levels of aid is a satisfactory outcome for most donors.

Broadly speaking, research on donor behavior consists of a theoretical and an empirical branch. Within the empirical branch, large-N statistical studies have mostly focused on how donors allocate a pre-determined quantity of aid (e.g Alesina & Dollar 2000; McGillivray 2003; Berthèlemy 2005), and—to a much lesser degree—on what determines aid efforts (e.g Round & Odedokun 2004). Case studies of individual donors have usually considered what factors shape particular aid policies (e.g Hoebink &

Stokke 2005). In all, the empirical branch offers little guidance as to how donors view the state of affairs regarding aid quantities.

Theoretical research on donor behavior has primarily been concerned with the motivation for giving aid. These studies are more relevant to this thesis as they provide a framework for understanding how donors view foreign aid. In this section, I review the theoretical literature on donor behavior and contrast it with empirical findings. The results are summarized in sub-section 1.3.3.

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1.3.1 Why give? – The theoretical foundations of foreign aid

Why do states provide aid to other states? According to Cato Seiglie (1999: 207) ―[t]he main objectives for providing foreign aid […] have been: 1) strategic, 2) economic and 3) humanitarian‖. It is important to note that most donors are motivated by a mixture of these objectives, although the ―the particular mix [differs], often sharply, between donors‖ (Riddell 2007: 92).

We begin with strategic motivation. It is often claimed that aid is widely used by donors to pursue political objectives (e.g. Sogge 2002; Tarp & Hjertholm 2000).

Stephen Browne (2006) even argues that aid is a proxy of a new form of imperialism.

In this view, foreign aid is primarily a foreign policy tool.

How can foreign aid promote national interests? One of the first to provide a comprehensive framework for understanding aid as a policy instrument was Hans Morgenthau. In his article A Political Theory of Foreign Aid (1962), he distinguishes between three ways foreign aid can pay strategic dividends.

First, aid can be in the form of military assistance to allies, the benefits of which are obvious. Second, the transfer of foreign aid can be an elaborate form of bribery, with which the donor buys political advantage from the recipient. Finally, aid can take the form of prestige aid; designed to enhance the standing of both the donor and the recipient on the international scene (Morgenthau 1962: 301-304).

If the strategic potential of foreign aid is obvious, the economic motivation is less clear. The standard economic model of aid is a transfer of welfare from one agent to another, entailing a net loss of welfare for the donor and a net gain for the recipient.

In other words, the donor is worse off and the recipient is better off after the transfer.

This is clearly a good deal for the recipient, but one is left wondering ―why the donor should ever make such a transfer‖ (Kanbur 2006: 1569).

Economists have identified several mechanisms that can improve the economic outcome for donors (Kanbur 2006: 1570-72). Economic spillover effects are one example. In an interdependent world, both positive and negative externalities can have far-reaching consequences. Presumably, aid can foster the first kind while preventing the other. Another possibility is the tying of aid in order to boost certain sectors of the

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donor‘s own economy. Tied aid can only be used to buy certain types of products, and exclusively products from the donor country. In effect, aid tying is ―a way of redistr ibuting income within the donor country‖ (Kanbur 2006: 1572). However, foreign aid is hardly a lucrative investment. Although aid can prevent negative spillover effects and aid tying can remedy the loss of donor welfare, the pure economic incentives to provide aid seem small.

The final type of motivation to consider is altruism, i.e., that the increased well- being of the recipient in itself motivates donors to give aid. It is often assumed that altruism is part of the rationale for giving aid. In his influential book Moral Vision in International Politics, David Lumsdaine (1993: 3) argues that foreign aid is a ―re- sponse to world poverty which arose mainly from ethical and humane concerns‖. As he points out, the concept of foreign aid was virtually nonexistent before 1949, and altruism is the only reasonable explanation of why states suddenly started giving away financial resources to other countries—often through international institutions over which they had little influence. Thus, the assumption that altruism can form part of a donor‘s utility function is not unrealistic.

The theoretical literature on donor motivation allows for some conclusions.

First, of the three kinds of motivation considered, economic motivation seems to offer the weakest incentives to give aid. If aid budgets were decided on economic grounds alone, they could very well be non-existent. Second, there are several possible strategic uses for aid. Consequently, a good deal of foreign aid can be expected to be given to promote national interests of various kinds. Finally, it is not unreasonable to assume that at least some aid is motivated by altruism.

1.3.2 To whom to give? – The allocation of foreign aid

Based on the theoretical discussion in the previous sub-section, we can expect aid to be allocated primarily out of strategic and altruistic concerns. The exact mixture of these two types of motivation will likely vary from donor to donor. In this sub-section, I look at how motivation influences donor behavior; in particular, how it affects a do- nor‘s generosity.

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Who would be more generous—a strategic or an altruistic donor? Clearly, a purely altruistic donor would have very strong incentives to provide aid (assuming that aid increases the utility of the recipient). The generosity of a strategic donor, on the other hand, would depend on to what degree foreign aid is an effective tool for promoting national interests.

The efficacy of strategic aid

The efficacy of foreign aid as a policy instrument depends on both the situation at hand and the donor‘s underlying strategic goals. As an example of both the merits and shortcomings of strategic aid, consider the case of Japan.

In the 1980s, Japan aspired to become an ―aid great power‖, relying on aid to achieve foreign policy goals. Reviewing this approach, Yasutomo (1989: 500) con- cluded that aid had been an ―effective diplomatic tool‖ for Japan, and that it had played a major part in restoring Japans position in Asia. A more recent assessment, however, modifies the picture by pointing to the failures of containing the military ex- penditures of China and North Korea, two of the biggest recipients of Japanese aid (Kuramoto 2007: 21).

In general, studies have found mixed support for the claim that aid is an effective foreign policy tool. However, evidence suggests aid is good for achieving certain objectives. Palmer et al. (2002) claim that aid is most useful for change-seeking pur- poses; a notion that fits nicely with Japans success at re-branding itself in Asia. One particular topic that has received much attention is whether foreign aid can buy UN votes. Examining UN voting records, Dreher et al. (2008: 157) find that ―US aid has indeed bought voting compliance‖, but they do not find this pattern with other G7 countries.

In sum, although foreign aid is, to some degree, a ―weapon in the political ar- mory of the nation‖ (Morgenthau 1962: 309) it is uncertain how effective a weapon it is. It seems reasonable to expect that, other things being equal, the more emphasis a donor places on strategic gains from foreign aid the weaker its incentives to give aid will be, compared with donors who are motivated by altruism.

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Strategic vs. altruistic motivation I: Generosity

Donor generosity is an understudied phenomenon. To my (and their) knowledge, only Round and Odedokun (2004) have undertaken a comprehensive, cross-national study of what determines aid effort. They do find a link between altruism and aid efforts:

donors with ―pro-poor‖ domestic policies and egalitarian income distributions tend to be more generous (measured as ODA percentage of GNI) than other donors (Round &

Odedokun 2004: 307).

Another way of assessing the theoretical expectation that altruism increases generosity is to use aid allocation as a proxy for motivation. One could expect an altruistic donor to give aid based on need, while strategically motivated donors could be expected to prioritize recipients within their ―sphere of influence‖, for instance neigh- bors or political and military allies. We can then check if donor countries with an altruistic allocation pattern differ from donors with a strategic allocation pattern when it comes to aid effort.

In Table 1.1, 14 countries are classified according to how they allocate their aid.

Countries that target their aid chiefly to poverty reduction are labeled altruistic. Con- versely, countries that primarily use aid as a tool for achieving other objectives are labeled strategic. Finally, the group of countries with an ambiguous allocation pattern is labeled mixed. The classification is based on an overview of studies of aid allocation given by Riddell (2007: 96-98). I have only included countries that have received enough scholarly attention to be classified.

Table 1.1 shows that the three groups differ markedly in generosity. On aver- age, altruistic donors have an ODA/GNI ratio of .77, while the corresponding number for donors motivated by strategic interests is .22; a difference of .54 percentage points.

This result, like the findings of Round & Odedokun (2004), provides some support for the stylized notion that altruism increases generosity.

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Table 1.1: Donor motivation and generosity

Strategic vs. altruistic motivation II: Proliferation

Are most donors strategic or altruistic? All donors display elements of both strategic and altruistic motivation in their aid giving. Since the end of the Cold War, the balance has probably shifted in the favor of altruistic motivation. However, in general, it is not controversial to argue that ―the underlying rationale of using aid to promote donor countries' strategic interests is still very much alive. Instead of allocating their aid based on where it is most needed, rich countries often favor recipients that are of direct political or economic interest to them‖ (Hirvonen 2005).

In fact, in a highly influential study, Alesina and Dollar (2000: 55-56), conclude that all the major donors generally base their aid allocation on strategic interests. This conclusion has later been modified, especially by McGillivray (2003) and Berthélemy (2005), but the impression that foreign aid is first and foremost a tool for promoting national interests still stands (see Riddell 2007: 94,98).

1.3.3 Are moderate levels of aid satisfactory for donor countries?

The existing literature on donor behavior leaves us with three general conclusions.

First, donors can have both strategic and altruistic motivations for giving aid. Second, donors that are motivated primarily by altruism are generally more generous than donors that emphasize strategic gains. Third, strategic motivation is more prolific than altruistic motivation.

These findings indicate that low quantities of aid may be a satisfactory outcome for most donors. In this view, donors may say they want to provide more aid, but that does not reflect their actual preferences. A logical continuation is that if donors were

Altruistic Mixed Strategic

ODA/GNI ratio .77 .33 .23

Altruistic: Sweden, the Netherlands, Norway, Denmark and Finland.

Mixed: The UK, Portugal, Spain, Belgium and Canada Strategic: The US, Japan, Australia and New Zealand Source: DAC 2010b.

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more altruistic, then actual delivery of aid would be more in line with the promises made.

Lack of altruism is often identified as the main obstacle to raising aid levels.

When John W. McArthur, manager of the UN Millennium Poject, pleads rich countries to ―contribute their fair share‖ (McArthur 2005), or when Nobel laureate Jeffery Sachs demands that the United States act on their ―obligations to the world‖ (Sachs 2004: 127), the underlying idea seems to be that if rich countries were less self- interested, they would give more aid.

The contribution of this thesis is to explore the possibility that low levels of aid might be an unsatisfactory outcome for donors. A novel thing about this approach is that it shifts the focus from agent to structure by considering how the circumstances in which the donors operate might reduce aid flows, instead of focusing solely on proper- ties of the donors themselves.

1.4. Research design

I use game theory to address my research question. This approach differs from the conventional way of studying donor behavior that has tended—through either statistical models or case studies— to focus on the determinants of donor preferences. In game theory, the preferences of the agents are determined exogenously. Instead, the focus is on outcomes; how a given outcome relates to other possible outcomes and how it came to be realized.

Broadly speaking, I have made two important methodological choices: (i) to formalize the analysis and (ii) to use game theory. In this section, I briefly discuss these choices.

1.4.1 Formal modeling

As a tool for analyzing social phenomena, formal models exhibit certain distinct characteristics. Most notable are their rigid demands on precision. A formal model states the relationship between the various components of a situation in mathematical form, allowing us to draw clear and unambiguous conclusions (Snidal 2004: 228).

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Obviously, explaining or predicting human behavior can never be done with mathematical precision. Hence, formal models have limited explanatory power in the study of, for instance, politics. However, they are excellent tools for theoretical en- quiry as they demand the researcher to be precise and make his or her assumptions explicit (Snidal 2004: 231-237).

My motivation for formalizing the analysis is based on the nature of the research question. First, the aim of this thesis is to develop an argument about donor behavior. In this endeavor, clarity and logical consistency are crucial, to which ends formalization is a useful tool (Hovi & Rasch 1996: 96). Second, comparing possible outcomes is essential for addressing the research question. Formalized models are good instruments for doing counterfactual analysis of this kind in a systematic fashion (Snidal 2004: 237).

A common criticism of formal models is that they are ―unrealistic‖. However, all models are unrealistic in the sense that they do not offer a complete description of the part of reality under consideration. In the social sciences, simplification is not only unavoidable, but also, to some degree, desirable (Hovi & Rasch 1996: 110). A better criterion to judge models by is whether they contribute to the understanding of the phenomenon at hand. The real danger is that formalization becomes an end in itself, and mathematical elegance displaces substantive interpretation as the main focus (Hovi & Rasch 1996: 100-101). Throughout this thesis I consistently use empirical examples to show how the formal analysis relates to the real world.

1.4.2 Game theory

Game theory is a theory of interaction between rational actors (Hovi 2008: 11). Hence, game-theoretic models are appropriate in cases where ―each actor‘s pursuit of her goals depends on the behavior of others‖ (Milner 2004: 270). In effect, the use of game theory is an assumption that interaction is important in the situation under consideration. In the case of donor behavior, this assumption may not always be valid.

In some cases, it is obvious that donor behavior is influenced by strategic interaction, most notably with a recipient country. However, in other situations, looking at donor decisions as strategic choices is not unproblematic. One such case considered in

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this thesis is the determination of the size of the aid budget (see chapter 4, section 4.2 for a discussion).

The motivation for using game theory in this thesis is twofold. First, game theory offers a fresh analytical perspective on situations that have largely been analyzed with other tools. Second, game-theoretic models are very useful for comparing and explaining how possible outcomes can be realized, i.e., sustained as an equilibrium. By modeling behavior both on and off the equilibrium path, such models can give us an idea of under which conditions different end states will materialize.

General assumptions

In game theory, it is common to make several underlying assumptions. First, game- theoretic models almost always assume that the agents involved are rational. The exact meaning of rationality is somewhat debated (see Hovi 2008: 17-21). However, simply put: ―[t]he rationality assumption holds that actors pursue their goals efficiently with the options available to them‖ (Snidal 2004: 247).

It is important to note that ―the goals‖ are always to maximize own utility. In- tuitively it would seem that only selfish actors would fit this criterion. However, rationality places no requirements on the utility function, which can consist of both selfish and unselfish interests (Hovi 2008: 17-21). The rationality assumption simply pro- hibits actors from taking actions that go against their own interests, whatever they might be.

The rationality assumption is a substantive assumption about human behavior, and as such it has clear shortcomings. First, as Jon Elster (1989: 28) points out: ―irra- tionality is quite widespread‖. Second, maximizing utility is clearly not the only driv- ing force behind social conduct. Thus, the rationality assumption should not be inter- preted as a complete account of human behavior. Nonetheless, assuming rationality is a fruitful point of departure for studying social phenomenon. After all, it is not unreasonable to assume that most people act rationally most of the time (Hovi 2008: 20).

Another common assumption is that of unitary actors. In the models presented in this thesis, the agents are states.³ Since states are complex organizations—consisting of many individuals with different and often contradictory beliefs and interests—

3 One exception: in chapter 5, I model a game between a state and a regime.

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treating them as unitary is problematic. Nonetheless, assuming that states are unitary actors is common in models of international relations. Unlike the rationality assumption, the unity assumption is made solely to simplify the analysis. As Scott Barrett (2003: 54) notes: ―This assumption [that states are unitary actors] is made purely for reasons of convenience. It is an assumption that we know is untrue‖. Something is surely lost with this assumption, but the gain is models that are much easier to inter- pret.

Finally, it is usually assumed that all players have common knowledge of the structure and the rules of the game, and the rationality of the other players (Gates &

Humes 1997: 9). Once again, this assumption is made more for analytical convenience than for representing an accurate description of the actors.

Aid games

Generally speaking, a game consists of five elements: (i) a set of players, (i) a set of available actions for each player, (iii) a set of possible outcomes, (iv) a characteriza- tion (payoff) of each outcome for each player, and (v) the rules of the game (Hovi 1998: 44).

The first task is to identify the players. Generally speaking, there are two types of agents on the international aid scene: donor states and recipient states.⁴ Thus, a do- nor‘s decision concerning the quantity of aid to provide may be influenced by (i) the actions of the recipient(s) or (ii) the actions of other donors.⁵ In this thesis, I look at two types of aid games: donor-recipient games and donor-donor games.

Outcomes, payoffs, and the rules of the game—including the sequence of moves and the information available to each player when making a decision—vary across the games in this thesis. However, they do have one common feature. Since both donors and recipients are sovereign states, I assume that they are unable to make binding commitments to each other. Consequently, all the games in this thesis are non- cooperative (Hovi 1998: 4).

4 I conveniently ignore the presence of NGOs, individuals and private companies.

5 A third possibility, that donor behavior may be influenced by the interaction between recipients will not be considered in this thesis.

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1.5. Plan

The thesis is structured as follows. Chapter 2 looks at the development of the current international aid regime, with a special focus on trends in donor generosity. In particular, it reviews the track record of compliance with the international 0.7 target and the current state of affairs regarding aid levels.

Chapter 3 considers donor-recipient games. The main idea of this chapter is that a donor may want to give aid only on the condition of certain behavior from the recipient and that lack of compliance from the recipient can hinder the aid flow. In this chapter, I draw heavily on the rich literature on aid conditionality.

Chapters 4 and 5 consider donor-donor games. In chapter 4, I present the argument that foreign aid can be seen as a public good, the quantity of which could be Pa- reto suboptimal as long as donors contribute non-cooperatively. The first part of this argument, that foreign aid is a public good, goes back to Olson and Zeckhauser (1966).

The conditions under which the provision of this good is Pareto suboptimal are novel to this thesis.

In chapter 5, I look at how agreements between donors on raising aid levels can fail to induce compliance. Assuming that the ex ante quantity of aid is Pareto sub- optimal (see chapter 4), failure to sustain compliance in such agreements represent an unsatisfactory outcome for donor countries. Scholars have paid scant attention to the strategic aspect of inter-donor aid treaties, but the rich literature on international cooperation in general (and environmental agreements in particular) provides a useful analytical framework.

This thesis offers two main explanations of donor stinginess. With respect to aid commitments between donors and recipients, the models in chapter 3 should give an idea of when an otherwise willing donor will restrict aid to a recipient. With respect to international commitments to raise aid levels—such as the 0.7 target—the models in chapters 4 and 5 should illustrate how the structure of the aid regime, not only lack of altruism, can lead to lower-than-promised levels of aid.

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Chapter 2 Empirical background

2.1. Purpose and plan

The purpose of this chapter is to establish key concepts such as ―foreign aid‖ and ―donors‖, and to give an idea of the development of the international aid system. The chapter is divided into three parts. First, in sections 2.2 and 2.3, I consider exactly what constitutes foreign aid and donor states. The second part (section 2.4) presents a brief overview of the history of international cooperation on foreign aid, and tracks the origins of the 0.7 aid target. The last section is devoted to aid levels. In this section, I consider the seemingly self-contradicting development that aid quantities have risen while, at the same time, donors have become less generous. Finally, I discuss whether the 0.7 target has had any effect on donor behavior.

2.2. What is foreign aid?

Broadly defined, foreign aid consists of all resources, including loans at concessional rates, transferred by donors to recipients.⁶ This definition does not mention anything about who the donors and recipients are. In this thesis, I focus on official aid flowing from donor states to recipient states, either directly (bilateral aid) or through international institutions (multilateral aid).⁷

Due to the vagueness of the term foreign aid, more narrow definitions are usually applied in the official discourse on aid. The terms development aid and development assistance are widely employed expressions referring to the part of foreign aid that is devoted to development and increasing human welfare in poor countries; in other words, what most people would associate with aid (Riddell 2007: 17-18). The line between development assistance and other forms of foreign aid has been the focus of much debate.

6 In this thesis aid is used synonymously with foreign aid.

7 In particular, this delimitation excludes private charity and NGOs.

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Probably the most comprehensive effort to define what constitutes development aid has been undertaken by the Development Assistance Committee (DAC) of the Or- ganization of Economic Cooperation and Development (OECD). Right from its con- ception, DAC was concerned with how to separate development aid from other trans- fers of resources in order to compare aid efforts across donor countries. It launched its first annual review of DAC Members´ Development Assistance Efforts and Policies in 1962, but it was not until 1969 that the members agreed on the concept of Official De- velopment Assistance (ODA) (Fuhrer 1994: 15, 21).

It would take another three years of debating before DAC settled on the definition of ODA that it still employs today. The definition sets certain criteria for a resource flow to be considered development assistance (see Box 2.1).

Although this definition brought some orderliness to the measurement of aid flows, it is by no means uncontroversial. The main problem is that it is a purpose-based definition: resource flows are categorized as development assistance if their ―main objective‖ is promotion of economic development and welfare (Box 2.1). However, finding the main objective behind a transfer of resources is no easy task. In theory this is to be decided by rigorous and objective evaluation by DAC, but official ODA figures from donors are seldom questioned (Riddell 2007: 21).

Throughout this thesis, I often use the terms ―aid‖ and ―foreign aid‖ synonymously with ODA as defined by OECD. However, I do not operate with any strict definition of what constitutes foreign aid, and the term generally refers to all resources transferred through official channels from donor countries to recipient countries, re- gardless of motivation and purpose.

ODA consists of flows to developing countries and multilateral institutions provided by official agencies, including state and local governments, or by their executive agencies, each transaction of which meets the following test: a) it is administered with the pro- motion of the economic development and welfare of developing countries as its main objective, and b) it is concessional in character and contains a grant element of at least 25 percent (calculated at a rate of discount of 10 percent) (Fuhrer 1994: 24).

Box 2.1: Definition of Official Development Assistance

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2.3. Who gives foreign aid?

The international aid system is a hotchpotch of organizations and actors that has developed ―incrementally, without evident systematic intent, over several devades‖

(Rogerson et al. 2004: 1). The result is a rather complex system:

The international aid system consists of a loose aggregation of more than 150 multilateral agencies, including the UN system agencies and the global and regional financial institutions […], 33 bilateral agencies which are members of OECD/DAC, at least 10 non-DAC governments providing sig- nificant sums of ODA, and a growing number of vertical global funds (Bu- rall et al. 2006: 4).

Adding to the complexity is the fact that new donors are emerging—often without ending to be recipients. These include the new members of the European Union, emerging global powers such as the BRIC countries, and other countries that are dis- covering aid as a foreign policy tool.⁸ Usually grouped together with the emerging donors are traditional donors that are not members of the OECD, including a number of Arab states (Grimm et al. 2009: 9-11).

The emerging donors are making their mark on the international aid scene. Chi- na, in particular, has captured the attention by explicitly pursuing an aid policy based on non-interference and non-conditionality (Grimm et al. 2009: 19). However, it is still the case that most aid is provided by ―Western‖ donors, meaning (primarily) the OECD/DAC countries, which account for roughly 90% of global aid flows (Grimm et al. 2009: 9). The key players in this group are the United States, Japan, the United Kingdom, France and Germany. Together, these countries account for about 66% of all ODA provided by the DAC donors (Riddell 2007: 55).

In this thesis, I mainly focus on donors within what has been labeled the ―West- ern consensus‖.⁹ In particular, I focus on the members of OECD/DAC. In general, the DAC countries are what I have in mind when using generic expressions such as ―rich‖

and ―developed‖ countries.

8 The newness of some of the new donors can be debated. For instance, both India and China have had foreign aid programs for decades.

9 See appendix for a list of ―Western donors‖

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2.4. International cooperation on foreign aid

Foreign aid is a relatively new concept, and usually recognized as a post-World War II phenomenon. The birth of modern foreign aid is popularly attributed to the Marshall Plan, through which the United States aided the recovery of a war torn Europe. How- ever, this is a bit misguided. The Marshall Plan was certainly an extraordinary and un- precedented undertaking, but governments had already been giving foreign aid for a long time at that point.

Riddell (2007: 25) argues that the most important aspect of the Marshall Plan was not the giving of aid per se, but how it was done: ―by donors pooling their resources together, by coordinating their aid efforts, under the United Nations if possible; and by insuring that the aid given would enable recipients to use it in ways they saw fit‖. The Marshall Plan laid the groundwork for the institutionalizing of the international aid system; a process that gathered momentum in the 1950s.

In 1960, the United Nations declared the coming decade the ―First Development Decade‖ (Resolution 1710). The 1960s saw the rise of a host of international aid organizations, together with a rapidly increasing number of both donors and recipients.

Foreign aid was becoming an enduring aspect of international relations, and increasingly seen as a matter of international cooperation. More than any other event, the establishment of DAC was a formalization of the latter notion.

DAC is an international forum for donor governments and multilateral organizations, ―working to increase not only the quantity, but also the quality of aid‖ (DAC 2010a). It was established in 1960 (then as DAG) to better coordinate the common aid efforts of the international donor community (Fuhrer 1994: 8-9).

Improving the burden sharing of financing development was a working goal for DAC right from the start—and a subject of much debate. In order to settle on a consensus, a comparative measure of donor generosity was needed. in 1969, the annual DAC Chairman’s Report published, for the first time, figures on ODA as percentage of gross national product (Fuhrer 1994: 21). This measure, popularly called the ―generosity ratio‖, would later serve as the basis for the 0.7 target.

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2.4.1 The 0.7 target

Aid targets—goals for the quantity of aid donors should provide—is a recurrent theme in the history of foreign aid. Many, perhaps most, donors have set national aid targets in addition to the many international targets (see appendix). The overarching aid goal is the 0.7 target, which stipulates that developed countries should commit 0.7 percent of gross national income (GNI) to ODA.¹⁰ The 0.7 target was first adopted by the UN General Assembly in 1970, and has later been reaffirmed a number of times. The most recent high-profile affirmation was at the 2002 International Conference on Financing for Development, which put the target in connection with achieving the Millennium Development Goals.

The origins of the 0.7 target go back to the dawn of international aid cooperation. In 1958, the World Council of Churches, which coordinated aid efforts from parishes in rich countries to parishes in poor countries, sent a statement to the United Na- tions urging rich countries to devote at least 1 percent of national income to grants and loans to poor countries.¹¹ It was favorably received, and in 1960 the UN General As- sembly adopted the resolution that the total sum of capital flows from rich countries to poor countries (both official and private) should be increased to approximately 1 percent of GNI (Clemens & Moss 2005: 4).

With the total capital target of 1 percent established, there was still no consensus on what percentage should be aid. Indeed, at this point there was still no consensus on what exactly constituted aid. The first steps towards an aid target were taken at the first two meetings of the United Nations Conference on Trade and Development (UNCTAD) in 1964 and 1968. Both meetings produced background studies on the issue of aid percentage, and in the second meeting the secretariat proposed to adopt a goal of providing 0.75 % of GNP as foreign aid. The member states, however, were unable to agree on a number (Clemens & Moss 2005: 7).

10 What is meant by the term ―developed country‖ is far from clear as ―[t]here is no established convention for the designation of ―developed‖ and ―developing‖ countries or areas in the United Nations system‖ (UNSTAT 2010). In common practice, Japan, the US, Canada, Australia, New Zealand and the Western European countries are considered ―developed‖ (Ibid.). Being a full-fledged member of OECD/DAC, it is probably fair to add South Korea to this list as well.

11 The Council did not provide any record for how they arrived at the 1 % figure. It is more than likely that they simply chose a round number that represented about a doubling of the current capital flows (Clemens & Moss 2005: 4).

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The aid community, with the World Bank President, Robert McNamara, in front, wanted more. In order to ―rejuvenate the commitment to the UNCTAD target‖

(Ibid.), McNamara, together with the British Minister for Overseas Development, Lord Reginal Prentice, conceived the Pearson Commission.

The establishment of the Pearson Commission is seen as a formative moment in foreign aid history. As Riddell (2007: 30) writes: ―the genre, style and approach of the Pearson Report […] set the tone for subsequent international reports on aid and development‖. In its report, the Commission was rather explicit about its agenda:

What was basically required of the Commission at its creation just over a year ago was that it elaborate an aid strategy based on a convincing rationale, that could be used to attack effectively the wariness of will so increasingly evident. For various reasons […] a number of the major donor countries were decreasing their foreign aid appropriations. In doing so, they were (and are) endangering the very viability of an international political idea that, until 1961, supported a rapidly increasing flow of concessional development finance from the richer to the poorer countries. (Excerpt of the Pearson Report (1969), WorldBank.org 2003).

The conclusion was equally crisp:

We therefore recommend that each aid-giver increase commitments of official development assistance for net disbursements to reach 0.70 percent of its gross national product by 1975 or shortly thereafter, but in no case later than 1980 (Pearson et. al 1969: 148-149, cited in Clemens & Moss 2005: 8).

The 0.7 target was born. The UN adopted the 0.7% figure (without a vote) at the declaration of the Second Development Decade, in the General Assembly in 1970. It would be reiterated at the beginning of every subsequent decade in a slightly different wording. The 0.7 target was also mentioned in UN declarations at the ―Earth Summit‖ in Rio de Janeiro (1992), the 1995 World Summit for Social Development in Copenha- gen, and the 2002 World Summit on Sustainable Development in Johannesburg (Clemens & Moss 2005: 8). However, despite its long history, the 0.7 target is most famous for its connection with the Millennium Development Goals.

In 2000, ―the largest gathering of world leaders in history‖ (UN Millenium Pro- ject 2006) adopted the UN Millennium Declaration that set eight global development targets to be reached before 2015, known as the Millennium Development Goals

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(MDGs). It is an ambitious list of objectives that aim to address poverty in all its forms.

Two years later, in 2002, the UN International Conference for Financing for Development in Monterrey settled the matter of financing the MDGs, known as the Monterrey Consensus. The Monterrey Consensus deals with a long list of different sources of finance, including a strong emphasis on trade and foreign direct investment (UN 2002: 5-8). However, it is remembered, above all, for re-establishing the 0.7 target: ―we urge developed countries that have not done so to make concrete efforts towards the target of 0.7 percent of gross national product (GNP) as ODA to developing countries‖ (UN 2002: 9).

This statement of the 0.7 target is widely held to carry more weight than the previous declarations; in part due to the larger context of the MDGs, and in part be- cause the conference was attended by more than 50 heads of state—unlike previous meetings where only UN representatives had been present (Clemens & Moss 2005: 9).

The more low key follow-up conference on financing for development held in Doha in 2008 reiterated the 0.7 target in the exact same wording (UN 2008: 12), as did the most recent UN summit on the MDGs held in 2010 (UN 2010: 29).

Whether these statements actually amount to a commitment to the 0.7 target is the subject of some debate. As Clemens & Moss (2005: 9) note: ―[it] is notable that none of the […] international statements on the 0.7% goal amount to promise to attain it‖.¹² However, despite the weak wording, the 0.7 target has certainly taken on the characteristics of a real commitment, and rich countries are routinely criticized for not living up to it.

2.5. A brief history of aid levels

Have aid efforts risen or declined over the last fifty years? Commenting on the history of aid levels is not a straightforward undertaking. Aid efforts have both risen dramatically and experienced an uneven but steady decline since 1960, depending on your measure of choice. Figure 2.1 illustrates the development for the DAC donors.

12 Several EU donors have made stronger commitments to the 0.7 target (see section 2.5.1).

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Figure 2.1: Aid levels since 1960 measured in total volume (current prices) and as percent- age of total GNI.

Source: DAC 2010b

The total volume of aid measured in nominal terms has increased dramatically while the generosity ratio (ODA as percentage of GNI) has fallen slowly in intervals until the end of the 1990s when it began a sluggish recovery. This illustrates two points about the development of foreign aid. First, the big increase in aid volumes tells us that aid has become an important part of international relations. There have been some periods of stagnation and decline—most notably in the 1990s—but the overall trend is a rapid expansion of aid volumes.

Second, even though the total volume of aid has risen, ODA as share of GNI has fallen from a high of 0.54 percent in 1961, to 0.31 percent in 2009. The fall has not been monotonous. A rapid decrease in the decade spanning from 1961 to 1971 was followed by a long period of stagnation that lasted until the 1990s, when it took a new plunge; reaching its lowest in 1997 when ODA constituted only 0.22 percent of GNI.

A slow increase began at the turn of the millennium, and is still going on today.¹³ It seems that donors have been providing ever more aid, while at the same time becoming less generous. Figure 2.2 shows how the shortfall between the target amount of ODA—the amount that would have been given if the DAC countries delivered on

13 The dramatic peak in 2005 is a result of a big multilateral debt forgiveness that counts as ODA 0,0 27,2 54,4 81,7 108,9 136,1 163,3 190,5 217,8 245,0 272,2

0 0,1 0,2 0,3 0,4 0,5 0,6 0,7

1960 1962 1964 1966 1968 1970 1972 1974 1976 1978 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 Billions $US

% of GNI

Year

ODA % GNI Total ODA

The Monterrey Consensus The 0.7 target adopted

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their commitment to the 0.7 target—and the actual amount of ODA provided has risen since 1960.

The DAC donors were closest to reaching the 0.7 target in 1961, nine years before it was adopted in 1970. At that point, an increase of only 30 percent was needed.

The DAC countries have never been this close again. During the 1990s, an increase of up to 200 percent would have been necessary. Currently, the DAC donors are 120 percent short of reaching the 0.7 target.

Figure 2.2: The amount of ODA provided compared with the target amount of ODA (current prices).

Source: DAC 2010b

2.5.1 Has the 0.7 target had any effect?

Figure 2.1 shows the trends that sparked the adoption of the 0.7 target in 1970. At the end of the 1960s there were distinct signs of donor weariness. The generosity ratio was falling steadily, and the growth in total aid volume had stagnated; the early enthusiasm for foreign aid was fading fast.

The 0.7 target was a response to these developments, but has it had any effect on aid efforts? It is difficult to assess. Although the 1970s saw a dramatic growth in total aid volume (from 1970 to 1980 it grew by a factor of 3.9), the generosity ratio never quite recovered to earlier levels.

0 50000 100000 150000 200000 250000 300000

1960 1963 1966 1969 1972 1975 1978 1981 1984 1987 1990 1993 1996 1999 2002 2005 2008

Million $US

0.7 percent of GNI ODA

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Aid levels seem to be correlated more with geopolitical events than with aid agreements. For instance, in the 1990s, the 0.7 target was reiterated three times—first in the General Assembly in 1990, then at the Earth Summit in 1992, and again at the World Summit in 1995—all without any measurable effect on falling aid levels. The decline in aid efforts in the 1990s is usually understood as a post-Cold War effect;

there were simply less strategic uses for foreign aid (Riddell 2007: 38).

One could argue that the reiterations of the 0.7 target during the 1990s were too low-profile to have any effect on donor behavior, and that it was not until Monterrey that the aid target experienced a proper revival. This argument seems reasonable. Mon- terrey, with its connection to the MDGs, created new momentum for the 0.7 target. In the period 2000-2004, the target was mentioned 584 times in the world‘s top 50 Eng- lish-language newspapers. In contrast, the corresponding figure for 1980-84 was 45 (Clemens & Moss 2005: 11).

The effect looks tangible. The ODA/GNI ratio bounced back after Monterrey, and has risen steadily since. In the Doha Declaration on Financing for Development (the follow-up of Monterrey), the participants expressed encouragement by the fact that ―some donor countries have met or surpassed the ODA target‖, and that others had

―established timetables for fulfilling their longstanding commitments‖ (UN 2008: 12).

It confidently announced the ―recovery of ODA from its declining trend before the Monterrey Consensus‖ (Ibid.).

It seems beyond question that Monterrey influenced aid efforts, but this effect is probably not as great as it appears on first inspection. First, the conference that produced the Monterrey Consensus took place in March 2002 and is unlikely to have had any effects on aid budgets before 2004,¹⁴ yet in 2002 the increase in aid levels was already well underway. This points to another culprit behind the revival of foreign aid, namely the comeback of political aid:

[T]he most rapid increases in ODA did not begin to materialize until after the terrorist attacks of 11 September 2001 on United States soil […] when aid-giving once again become more closely intertwined with wider political agendas (Riddell 2007: 39).

14 This is due to the fact that the aid budget for 2003 in most countries was already set at that point. In the US for instance, the President presented the budget for the next fiscal year in February.

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Looking at where this new aid was directed gives an idea of how much of the rise in aid levels can be chalked up to geopolitics. Although total ODA to least developed countries (LDCs) increased by 300% from 2000 to 2008, a good deal of this increase was accounted for by Afghanistan which, in the same period, saw an surge in ODA of over 4500%. The case of Iraq is even more astonishing, from 2000 to 2008 the flow of ODA to the country increased by a factor of 116 (DAC 2010b). Thus, being invaded by the US seems like a better predicator of receiving aid than being poor.

However, aggregate ODA statistics tell only one part of the story. The effects of Monterrey, and the 0.7 target in general, are more visible on a disaggregated level. The last part of this section traces the imprints of Monterrey on particular of donors.

The European Union

One of the more concrete effects of Monterrey is to be found among European Union- donors. In 2005, following a European Commission-report on Translating the Monter- rey Consensus into practice, the EU developing ministers laid out a road map for reaching the 0.7 target. In a much stronger wording than in the Monterrey Consensus, the EU set both a collective aid target (0.56 % of GNI by 2010) and group targets:

0.7% of GNI for its high income members, and 0.33% of GNI for members that joined the EU after 2002 (EU 2006: 18).

In addition, several high-income EU states have unilaterally committed themselves to timetables for meeting the 0.7 target. Britain, France, Finland, Ireland, Bel- gium and Spain are all set to reach it by 2015, while Germany, Italy and Portugal have made qualified commitments to do the same (Inter Press Service 2005). The question is of course if these promises have translated into action.

Concord, a NGO that monitors the EUs development efforts, shows a mixed picture in their most recent assessment. Several countries remain on track for reaching the interim 2010 target of 0.51%, including Belgium, Britain, and Finland. However, Germany, France, Portugal, Italy and Greece will all fall well short of the target. Spain is a curious case: it is slashing its aid budget (down by €285 million) but will still likely reach its target due to a fall in GNI (Concord 2010a: 5).

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To sum up, Monterrey has played a part in making EU leaders set ambitious aid goals, and aid flows from the region are on the rise. However, it remains to be seen if these long-term commitments translate into actions.

The United States

The United States is by far the biggest donor on the international scene. If the DAC community is ever going to come close to the 0.7 target, the United States will have to bear its part of the burden. Collectively the DAC countries were $152 billion short of the target in 2009, of which $97 billion (47.1%) would have come from the US alone (DAC 2010b).

When it comes to the 0.7 target, the US has been reluctant to make binding commitments. Right from the beginning it has taken an ambivalent position on the issue by being neither a proponent nor an opponent of the aid target. The official line, which has remained unchanged since the Nixon administration, is to ―support the prin- ciple of a global aid target while at the same time […] not subscribe to any specific date for attaining it‖ (Clemens & Moss 2005: 10).

Thus, the 0.7 target seems to have had little effect on the aid efforts of the biggest donor. Variations in the US‘ generosity can for the most part be attributed to other factors than international aid agreements.

The G 0.7

The clearest legacy of the 0.7 target is the G 0.7: the exclusive group of countries that meet the 0.7 target. It currently consists of five countries: Norway, Sweden, Denmark, Luxembourg and the Netherlands.¹⁵

Sweden and the Netherlands were the first countries to provide 0.7% of GNI to ODA, in 1975. They were joined by Norway in 1976 and by Denmark in 1978. After Denmark, it would take 22 years for another country to join the G 0.7, when Luxem- bourg reached the target in 2000 (DAC 2010b).

Interestingly, no country that has reached the 0.7 target after it was adopted in 1970 has let the ODA/GNI ratio fall back below 0.7%. This might very well be the biggest achievement of the 0.7 target: once a donor meets the target, it would be very noticeable if it suddenly failed to do so one year. This was not the case before 1970

15 Belgium might be joining this group in 2010.

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when, for instance, France went from providing 1.36% of GNI as ODA (the still- standing record) to 0.52% in less than a decade (Ibid.).

The establishment of the aid target has, to some degree, dichotomized aid efforts and singled out a small exclusive group of ―generous‖ donors. This has created an opportunity for countries to distinguish themselves. Many factors likely influence the decision by the G 0.7 countries to provide considerable amounts of foreign aid.

However, the lure of standing out as ―generous‖ on the international scene created by the 0.7 target is no doubt one of them.

2.6. Summary

In this chapter, we have seen how the institutionalizing of international cooperation on foreign aid gathered momentum in the 1960s on a backdrop of increasing donor fa- tigue. At the end of the decade, the donor community, led by the World Bank, sought to revive aid efforts by establishing an international aid goal. Followingly, the 0.7 target was adopted by the UN General Assembly in 1970.

The 0.7 target has since been the banner under which aid advocates of all kinds have rallied. Donor countries have generally been positive to the idea of attaining the target. Actually doing so, however, has eluded most of them. Has international cooperation on foreign aid been a failure when it comes to increasing aid efforts? To some degree it obviously has. It seems that international aid agreements have not been overt- ly effective in increasing aid levels, which remain at the mercy of geopolitics. But as this chapter argues, they have had at least some effect.

First, the adoption of the 0.7 target in 1970 probably influenced the Nether- lands, Denmark, Sweden and Norway to increase their aid budgets over the ensuing decade and to keep aid efforts high. Similarly, it is not unlikely that the allure of the 0.7 target also was a motivation for Luxembourg when it did the same in the years leading up to 2000.

Second, although the Monterrey Consensus has yet to produce any new members to the G 0.7 it brought new public attention to the 0.7 target, which probably played a part in compelling EU donors to lay out a timetable for reaching it. If at least

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some of the EU donors follow through on their commitments, Monterrey has certainly accomplished something.

Still, rich countries are continuously failing to honor their aid promises, something which poses a question: why do donor countries keep reiterating aid targets and then fail to meet them? After all, for the majority of rich countries the existence of the 0.7 target only serves to make themselves look bad. Could it be that aid targets are more than lip service, and that donors actually want to increase aid levels? The next chapters in this thesis consider how aid levels might fail to increase even if donors want to give more.

Aid Commitments and Strategic Behavior : Game-theoretic explanations of donor stinginess